A Tribute to the Thoughts of Another and his Friend"Everyone knows where we have been. Let's see where we are going!" -Another

Saturday, October 11, 2008

The Thoughts of Another are Now Blowing in the Wind

Some of ANOTHER (THOUGHTS!) on the value of paper, circa 1997:

In essence, it is of the same value as the currencies, "the thoughts of nations, blowing in the wind".

How can one know value in currency, when paper does not lie still? It moves at night, where noone can see, and this we hold to prove our worth? Real things know not this paper value, for they hold tight in the earth. In this time, we do stand firm with value and watch as "thoughts of others change in the wind"!

All persons hold wealth as never before, but search in vain for "this measure", one that "blows not in the wind of thought".

Hold your worth firm on the ground as no storm will move a true value with weight, a weight for the winds of this season, gold!

How long do persons continue to make these paper claims to "bonds", "stocks" and "currencies" that are produced in numbers as the leaves on the trees? These seasons of spring and summer of twenty years time, have offered a harvest to gather wealth that lasts for centuries. When the economy of the dollar, becomes as your "Autumn" and arrives suddenly, they will pause from this foolishness. In that time, the savings for the future of their children will be as these dried "leaves"of winter, blowing in the wind!

NEW YORK - Trillions in stock market value — gone. Trillions in retirement savings — gone. A huge chunk of the money you paid for your house, the money you're saving for college, the money your boss needs to make payroll — gone, gone, gone.

Whether you're a stock broker or Joe Six-pack, if you have a 401(k), a mutual fund or a college savings plan, tumbling stock markets and sagging home prices mean you've lost a whole lot of the money that was right there on your account statements just a few months ago.

But if you no longer have that money, who does? The fat cats on Wall Street? Some oil baron in Saudi Arabia? The government of China?

Or is it just — gone?

If you're looking to track down your missing money — figure out who has it now, maybe ask to have it back — you might be disappointed to learn that is was never really money in the first place.

Robert Shiller, an economist at Yale, puts it bluntly: The notion that you lose a pile of money whenever the stock market tanks is a "fallacy." He says the price of a stock has never been the same thing as money — it's simply the "best guess" of what the stock is worth.

"It's in people's minds," Shiller explains. "We're just recording a measure of what people think the stock market is worth. What the people who are willing to trade today — who are very, very few people — are actually trading at. So we're just extrapolating that and thinking, well, maybe that's what everyone thinks it's worth."

Shiller uses the example of an appraiser who values a house at $350,000, a week after saying it was worth $400,000.

"In a sense, $50,000 just disappeared when he said that," he said. "But it's all in the mind."

Though something, of course, is disappearing as markets and real estate values tumble. Even if a share of stock you own isn't a wad of bills in your wallet, even if the value of your home isn't something you can redeem at will, surely you can lose potential money — that is, the money that would be yours to spend if you sold your house or emptied out your mutual funds right now.

And if you're a few months away from retirement, or hoping to sell your house and buy a smaller one to help pay for your kid's college tuition, this "potential money" is something you're counting on to get by. For people who need cash and need it now, this is as real as money gets, whether or not it meets the technical definition of the word.

Still, you run into trouble when you think of that potential money as being the same thing as the cash in your purse or your checking account.

There's a key distinction here: While the money in your pocket is unlikely to just vanish into thin air, the money you could have had, if only you'd sold your house or drained your stock-heavy mutual funds a year ago, most certainly can.

"You can't enjoy the benefits of your 401(k) if it's disappeared," Jorgenson explains. "If you had it all in financial stocks and they've all gone down by 80 percent — sorry! That is a permanent loss because those folks aren't coming back. We're gonna have a huge shrinkage in the financial sector."

There was a time when nobody had to wonder what happened to the money they used to have. Until paper money was developed in China around the ninth century, money was something solid that had actual value — like a gold coin that was worth whatever that amount of gold was worth, according to Douglas Mudd, curator of the American Numismatic Association's Money Museum in Denver.

Back then, if the money you once had was suddenly gone, there was a simple reason — you spent it, someone stole it, you dropped it in a field somewhere, or maybe a tornado or some other disaster struck wherever you last put it down.

But these days, a lot of things that have monetary value can't be held in your hand.

If you choose, you can pour most of your money into stocks and track their value in real time on a computer screen, confident that you'll get good money for them when you decide to sell. And you won't be alone — staring at millions of computer screens are other investors who share your confidence that the value of their portfolios will hold up.

But that collective confidence, Jorgenson says, is gone. And when confidence is drained out of a financial system, a lot of investors will decide to sell at any price, and a big chunk of that money you thought your investments were worth simply goes away.

If you once thought your investment portfolio was as good as a suitcase full of twenties, you might suddenly suspect that it's not.

In the process, of course, you're losing wealth. But does that mean someone else must be gaining it? Does the world have some fixed amount of wealth that shifts between people, nations and institutions with the ebb and flow of the economy?

Jorgenson says no — the amount of wealth in the world "simply decreases in a situation like this." And he cautions against assuming that your investment losses mean a gain for someone else — like wealthy stock speculators who try to make money by betting that the market will drop.

"Those folks in general have been losing their shirts at a prodigious rate," he said. "They took a big risk and now they're suffering from the consequences."

"Of course, they had a great life, as long as it lasted."

Just how often do we see this kind of an explanation being made to the public? The answer is not very often. I made a comment about this the other day:

FOFOA said... Ender,

This is what I think is hard for people to understand. Let's think about a stock market crash of 3000 on the Dow. That would be a massive bloodbath. But do any stocks disappear? No. All stocks that have been issued by companies still remain. If there were 100 Trillion shares before the crash, there are 100 Trillion shares after the crash.

So do dollars disappear? Nope. There are still the same amount of dollars in the world as there were before the crash. If there were $60 Trillion dollars before the crash (counting all currencies), then there are still $60 Trillion dollars after the crash!

So what just happened? There was such a bloodbath. So many people went broke. Suicides, chaos... But what actually happened? There are still the exact same number of dollars and the exact same number of stocks in existence.

What actually happened is difficult to understand. Money wasn't lost. If you lost something, it wasn't money. This is the key to everything IMO.

FOFOA

ps. This imaginary scenario is a real possibility right now.

October 5, 2008 12:50 PM

Ender said... Perceived value is an interesting thing. It depends on another.

Functional value does not.

October 5, 2008 1:02 PM

It is interesting that over the years the public has been conditioned to be scared of this:

Back then, if the money you once had was suddenly gone, there was a simple reason — you spent it, someone stole it, you dropped it in a field somewhere, or maybe a tornado or some other disaster struck wherever you last put it down.

And then "they" gave us a more "secure" place to "put" our "money". And the icing on the cake? They called it a "security". How about this one... a "Mortgage Backed Security". And all the while, even to this day, they talk trash about gold, especially about the crackpots that actually hold physical gold in the security of their homes.

As Another said long ago, "My thoughts are as free as the wind", "Secrets are for fools", "All paper will burn", and "Time will prove all things."

Those are powerful words, especially if you consider, as I do, that Another might have been an actual European Central Banker, not unlike those meeting this weekend to plan out the future of paper.

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